Date: December 20, 2005
U.S. Securities and Exchange Commission
Division of Corporation Finance
Mail Stop 6010
701 First St. NE
Washington, DC 20549
Attn: Angela J. Crane
Accounting Branch Chief
Re: Environmental Tectonics Corporation
Form 10-K/A for the fiscal year ended February 25, 2005
Filed May 26, 2005
File No. 1-10655
Dear Ms. Crane:
On behalf of Environmental Tectonics Corporation, this letter is in response
to the comments of the Staff of the Division of Corporation Finance of the
Securities and Exchange Commission that were contained in your letter of
December 7, 2005 with respect to Environmental Tectonics Corporation's Annual
Report on Form 10-K/A for the fiscal year ended February 25, 2005. For your
convenience, Environmental Tectonics Corporation's responses are keyed to the
SEC's comments.
Form 10-K/A for the period ending February 25, 2005
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Management Discussion and Analysis, page 2
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Liquidity and Capital Resources, page 12
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1. SEC Comment: "Revise future filings to define the financial ratios and
minimum net worth requirements required in your financial covenants. Explain
what would happen if you were unable to obtain a waiver or an amendment from
your lender on reasonable terms and the kind of interest rate increases that
could be imposed."
Company Response: We agree with the SEC's comment. Beginning with the Form
10-Q for the fiscal quarter ended November 25, 2005, which is required to be
filed on January 9, 2006, we will revise our disclosure to include (i) a
detailed explanation of the financial ratios and minimum net worth requirements
included in our debt agreements, and (ii) the consequences if we did not meet
the requirements set forth in our debt agreements and were unsuccessful in
obtaining a waiver with respect to non-compliance with these covenants and/or an
amendment to our agreements. These consequences could include our inability to
access funds under such agreements and our being subject to various penalties
and other obligations to our lenders based on such defaults. Under a default,
the interest rate on any applicable outstanding loan amounts would increase by
three percentage points.
Balance Sheet, page 19
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2. SEC Comment: "We note that on page 23 of your footnotes that all the
remaining claims revenue may not be received during fiscal 2006. Please tell us
why none of your accounts receivables are classified as non-current assets on
your balance sheet. Explain the classification for all periods presented."
Company Response: Under accounting principles generally accepted in the
United States of America (Accounting Research Bulletin No. 43, Chapter 3,
Section A, paragraph 4), "...the term current assets is used to designate cash
and other assets or resources commonly identified as those which are reasonably
expected to be realized in cash or sold or consumed during the normal operating
cycle of the business." Reg. 210.5-02 of Regulation S-X, under Assets and Other
Debits, Section 3(c)(4), requires that billed or unbilled amounts representing
claims be identified and that the filer should "state the amounts included in
each item which are expected to be collected after one year." Statement of
Position No. 81-1 issued by the Accounting Standards Division of the American
Institute of Certified Public Accountants outlines the accepted accounting
principles on the recognition of claims revenue but is silent on the
classification of resulting claim receivables.
We have a long and successful history of preparing, recording, filing and
litigating contract claims both with the U.S. Government and foreign
governments. In our experience, we have found that it is equally probable that
resolution and collection of outstanding claims can occur either during or after
the twelve month (i.e., current) period following the fiscal period(s) in which
they are recorded. Although initially related to the status and timing of first
the claims process and second any formal litigation with respect to the claim,
the ultimate resolution of claim issues often reflects seemingly
non-contractual-related events (e.g., change of personnel, government settlement
initiatives, funds availability, etc.) and can happen at any stage of the
process.
Statement of Operations, Page 20
3. SEC Comment: "We note on page 12 of your MD&A that interest expense includes
insurance proceeds for a stolen simulator. Generally, we would expect to see
insurance proceeds for the loss of an operating asset to be recorded in
operations. Please tell us why the current classification as an offset to
interest expense is appropriate. Also, explain where these proceeds are recorded
in your statement of cash flows."
Company Response: Although discussed in the MD&A under the paragraph labeled
"Interest Expense", the insurance proceeds are actually recorded in the
Consolidated Statement of Operations under the section entitled "Other expenses"
and the classification entitled "Other, net". The proceeds are not included in
interest expense, net, on the Consolidated Statement of Operations. We also note
that the amount recorded is that amount which was received in excess of the
carrying value of the stolen simulator.
The rationale for recording the net insurance proceeds in the Other, net,
classification is that these amounts in excess of the carrying value of the
asset are considered non-operating income and therefore not appropriate to be
included as part of operating income.
With respect to the Consolidated Statements of Cash Flows, the carrying cost
of the simulator was being recorded in inventory, so the transaction would been
included in two line items: 1. as a reduction of inventory, and 2. as cash flow
from net income.
Management of Environmental Tectonics Corporation understands that they are
responsible for the adequacy and accuracy of the disclosures in its public
filings. Management of Environmental Tectonics Corporation also understands that
any comments by the staff or any changes in Environmental Tectonics
Corporation's disclosures in response to Staff comments do not foreclose the
Commission from taking any action with respect to the filings and that
Environmental Tectonics Corporation may not assert this action as a defense in
any proceeding initiated by the Commission or any person under the federal
securities laws of the United States.
After your review of our responses, please feel free to contact me directly at
215-355-9100 (ext 1203) should additional information be required.
Sincerely,
Duane D. Deaner
Chief Financial Officer
Environmental Tectonics Corporation